Large Diversified Banks Lag in Profit Growth, Study Finds

Moyer, Liz, American Banker

Megabanks that offer multiple products to a broad variety of customers have sharply lower earnings growth than do more specialized competitors, according to a study of large banks by Booz-Allen & Hamilton Inc.

Comparing performance of the nation's 65 largest diversified banks with financial companies that specialize in a narrower band of products, the management consulting firm found that the bureaucracy and overhead of a traditional large bank-what Booz-Allen calls a multiline bank-drag down revenues and profits.

"In the past few years, multiline banks have created this pressure to add more and more" products and features, said Harry Totonis, senior vice president and head of the New York-based firm's financial institutions practice. "That creates higher costs and greater complexity, and it doesn't improve service."

Booz-Allen found that the average five-year rate of profit growth at "monoline" financial companies was 60%, three times that of multiline banks.

The study, conducted during the last year with the Cambridge, Mass., research firm Abt Associates, adds fuel to the debate about the merits of the financial supermarket. Contrary to what many people assume, scale and scope have "very significant diseconomies," said Sean Ryan, an analyst at Bear, Stearns & Co.

"The hard part is finding out what customers want and finding a way to focus on that," Mr. Ryan said. Offering all things to all people often is just "naked empire-building."

Though it is easy enough to cut expenses by eliminating staff, large banks may have to look harder for the hidden costs within individual businesses, Mr. Totonis said.

Redesigning products and businesses to eliminate layers of complexity would lower large banks' distribution costs 30% to 40% and boost revenues by 20%, he said.

Executives at large institutions defend their strategy, explaining that customers with more than one relationship are more profitable in the long run.

Citicorp and Travelers Group, which merged last year to form Citigroup, based their deal on this premise.

"History has said that the more products a customer will buy from you, the better chance you have of keeping that customer for a long time," Sanford I. Weill, co-chairman and co-chief executive officer of Citigroup, said in an interview late last year.

"They like the convenience," Mr. Weill said.

Diversified companies also have a cushion in bad times, analysts said.

"Monolines have more exposure to a single business," said Gerard Cassidy, a bank analyst at Tucker Anthony Inc. "They will be more adversely affected if a downturn hits that business."

Still, diversified companies have higher costs, consultants and analysts said. That is partly because monoline companies have emerged in an age that puts a premium on efficiency, analysts said.

Though diversified banks have renewed their emphasis on efficiency, they "haven't had the culture, the discipline, and the focus in place long enough," said Henry C. …

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